Business law

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Business law

  1. 1. Business Law Chapter VI BUSINESS LAWA. COMPANY LAWIntroduction Since the implementation of the 25-year economicdevelopment-planning program, Indonesian economic growth canbe attributed to an increase in participation of small and largebusiness enterprises. Not only has there been an increase in assetsand capital accumulation, enlistment of human resources, but alsobusiness resources (which from time to time create a businesscycle). One of the business entities that dominate, in the Indonesianbusiness sector, is the Limited Liability Company. As a createdlegal entity, it is necessary for an Indonesian Limited LiabilityCompany to be supported not only by its own organs, but also byclear and concise regulations in order to maximize and utilize itsorganizational and managerial ability effectively and efficiently.Hence, strong and stable business entities are very important toenhance national development. It is therefore necessary to have abrief overview of business organizations within the framework ofIndonesian Company Law.Indonesian Legal System 135
  2. 2. Business LawTypes of Business Organizations Indonesia’s commercial sector recognizes three principalcategories of business organizations: sole proprietorship,partnership (general or limited) and company. Sole proprietorship isgenerally used in the informal sector, since its nature and activitiesare of the informal sector. For example, it does not require formalregistration to Indonesian authorities. There are three types of partnership: persekutuan perdata(maatschap or private association), persekutuan firma (venootschaponder firma or firma, “FA”) and persekutuan komanditer(commanditaire vennootschap, “CV”). The Indonesian Civil Codegoverns the first type of partnership whereas the rest are governedby both the Indonesian Civil Code and the Indonesian CommercialCode. It is not easy to determine absolute equivalents between thesepartnerships and partnerships under common law tradition;however, the maatschap and firma closely resemble the concept ofa general partnership under the common law system whereas thecommanditaire venootschap resembles limited partnership undercommon law. The last type of business organization is under theIndonesian Company Law takes the form of Perseroan Terbatas(“PT”). It is similar to the incorporated limited liability companyunder the common law system. Historically, this was referred to asthe Dutch corporate model known as the naamloze venootschap(“NV”). However, since the enactment of the new IndonesianCompany Law, which repealed the provisions governing thecompany, many companies started to use the abbreviation “PT”.There was also another form of an Indonesian incorporatedcompany, which was intended to be used by indigenousIndonesians, so-called “the Maskapai Andil Indonesia”(Indonesische Maatschappij of Aandelen or IMA). It wasgoverned by separate regulations, i.e. Ordinances 886. However,the promulgation of the new Indonesian company law in 1995abolished the dualism of the Indonesian company structure - PT136 Indonesian Legal System
  3. 3. Business Lawunder the Commercial Code and PT under IMA, and brought theIndonesian company structure into one common corporate regime:the (New) Indonesian Company Law. Until now, there are three types of companies in Indonesia.The most common is “PT Biasa” or local companies. Even though itonly has Indonesian shareholders, directors and commissioners, it isstill subject to regulation by the UUPT. It is required to have aminimal capital, as stated in the UUPT. Although GovernmentRegulation No.20 of 1994 (“PP20”) states that foreigners mayacquire shares in this type of company, in practice, it is closed toforeign investment and foreign citizens are not allowed to holdpositions of director or commissioner, unless the field of business isnot listed on a negative list, in which a specific written approvalfrom the relevant Minister is given. The second type is a domesticinvestment company referred to as “PT PMDN” (PMDN Company),which has certain regulatory advantages and tax concessionscompared to a PT Biasa. Originally, a PT PMDN company wasreserved to Indonesian shareholders, but following the enactment ofPP20, the Decree of Chairman of BKPM (Investment CoordinatingBoard) 15/SK/1994 (“SK15”) and the current practice of BKPM, itbecame possible for foreign parties to acquire up to 95% of theshares in the company. Such a company with a foreign shareholdermay have foreign directors and/or commissioners. To obtain statusas a PMDN company, the company has to have BKPM approval forthe line of business it is operating as and is required to have aminimum investment equivalent to the exchange rate as stated inBKPM’s letter of approval (specifically in rupiah) set by BKPM.Finally, there is the foreign investment company incorporated in theForeign Investment Law of 1967 Law No. 1 of 1967 also known asthe “PT PMA” (PMA Company). It may have foreigners as itsshareholders so long as it has at least two shareholders, but it has anobligation to invest an unspecific percentage to Indonesia within 15years. It may have foreigners as director and commissioner, enjoycertain advantages and protections against expropriation of theIndonesian Legal System 137
  4. 4. Business Lawinvestment. However, it has an obligation to report its activitiesregularly to BKPM. BKPM will approve the minimum investmentplan of this company that is specified in both US dollars and rupiah. .The (New) Company Law Framework Ever since Indonesia’s independence, business sectors andmainly business enterprises have played an important role infostering Indonesia’s economic growth. There are variousregulations that govern Indonesian business organizations.Presently, the laws of Indonesian business organizations areprimarily governed by the Law on Limited Liability Company, LawNo.1 of 1995 (Undang-Undang tentang Perseroan Terbatas or“UUPT”) which is considered modern Indonesian company law(referred also as the New Indonesian Company Law), theIndonesian Civil Code (Kitab Undang-Undang Hukum Perdata orBurgelijke Wetboek), and the Indonesian Commercial Code (KitabUndang-Undang Hukum Dagang or Wetboek van Koophandel).The last two codes were first promulgated during the Dutch colonialrule. The UUPT, consist of 129 articles and was enacted onMarch 7, 1995 and came into effect a year later. Prior to theenactment of UUPT the limited liability company was governed byonly twenty-one articles in the Indonesian Commercial Code. TheUUPT symbolizes the first major revision of the Indonesiancompany law since the commercial code. The promulgation of thelaw was a response to the rapid economic progress that neededprovisions to complement international practices and the moderncommercial sector. This paper will focus on the UUPT since itserves as the basis of Indonesian corporate structures.138 Indonesian Legal System
  5. 5. Business LawSeparate Legal Entity PT, as an Indonesian company, is a legal person who has alegal identity separate from its shareholders. Thus, shareholders arenot personally liable for the obligations of the company. Theshareholders have limited liability to the extent that their liabilityfor the acts of the company can be limited to their capitalcontribution. Nevertheless, there are some limited possibilities topierce this corporate veil, for instances in the event that the relevantshareholders either directly or indirectly with bad faith takeadvantage of the company solely for their personal interest or therelevant shareholders either directly or indirectly unlawfully usecompany’s asset causing the company’s assets to be inadequate tosettle company’s debts.Incorporation There are four steps for incorporating a PT. First, executethe deed of establishment, which also includes the company’sarticle of association before a notary in the form of a notarial deed.Second, obtain a formal approval over the deed from the Ministry ofLaw and Regulation. Upon approval, the deed has to be registeredin the Company Registry that is maintained by the Ministry ofIndustry and Trade. Lastly, publish the deed of establishment in theState Gazette. It needs to be pointed out that prior to the registrationand publication processes, the liability of a company can be put inthe hands of its directors. In other words, in addition to the liabilityof the company, a personal liability of the director’s may arise if thenew company fails to register and publish the approved deed. Another requirement in establishing a PT is to have at leasttwo persons as the founders or shareholders. The eligible person canbe an individual or a legal entity. With an exception for PT BUMN(State-Owned Company) can be established by a single entity, thegovernment. The requirement to have at least two shareholders stillcontinues. If a PT has only one shareholder and it does not offerIndonesian Legal System 139
  6. 6. Business Lawshares to other shareholders within six months, then the existingshareholder is personally liable for the agreements and losses of thecompany. The requirement to have at least two shareholders isbased on contractual theory, a conception that a PT is a product ofcontract, thus it requires two or more shareholders at all times.Share Capital and Voting Rights The UUPT requires a company to have a minimumauthorized capital of 20 million rupiah. Issued capital must be atleast 25% of the authorized capital and by the time of approval ofthe Articles of Association of the new company by the Minister ofLaw and Regulation, all the issued capital must be fully paid up.However, in the case of a PMA company and a PMDN company,usually BKPM requires a higher minimum capital level ofinvestment. A company may issue registered and bearer shares and mayalso issue non-voting shares. Furthermore, it can issue redeemableand convertible shares, cumulative and non-cumulative shares, andpreference shares. However, a company must have at least one classof ordinary shares (“saham biasa”) with voting rights. Payment forshares can be made in cash or in other forms (“in kind”), butpayment in kind, such as of real property in consideration for theissue of shares, requires an independent expert valuation. Under theUUPT, a company may not issue shares to itself or to its subsidiary.Subsidiary is defined as a company in which the parent companyowns more than 50% of its shares or the parent company controlsmore than 50% of the voting rights in a General Meeting ofShareholder (“GMS”), and/or the parent company influencesmanagement control such as the appointment and dismissal ofdirector and commissioner. However, under special circumstances,it can buy back the issued shares and hold them as ‘treasury shares’that the company can sell at a later date. Such shares cannot be140 Indonesian Legal System
  7. 7. Business Lawcounted to form a quorum nor can the voting rights be attached tothe shares being exercised.Directors, Commissioners & Shareholders Meeting Indonesian corporate structure is different from thecommon law system, since it adopts a two-tier managementstructure instead of a single-tier management. The managementstructure comprises of Board of Directors (“BOD- Direksi”) andBoard of Commisioners (“BOC-Dewan Komisaris”). Seniorofficers are responsible for the company’s actual management in theoperational sense is the Direksi. Even though there is one director,there is usually more than one. The basic functions of the Direksiare to manage and represent the company, and not the shareholders.The second tier is Komisaris (“Commisioner”), which has the roleof supervising and advising the Direksi, and representing theinterests of the company and not merely the interest of theshareholders. The requirement of a company to have a BOC is asignificant alteration from the old provision (the Code). To date, allpublic companies, companies in the business of mobilizing fundsfrom the public or companies that issue debt instruments must haveat least two directors and two commissioners. The UUPT alsodistinguishes between the collegial nature of the BOD and the non-collegial nature of the BOC. Where a company has more than onecommissioner, the BOC constitutes a council pursuant to theElucidation that no individual commissioner can represent thecompany if there is more than one commissioner. In contrast, whena company has more than one director, each director has theindividual authority to represent the company unless the company’sarticles of association states otherwise. Although the primaryresponsibility of managing the company rests on the directors, insome circumstances, commissioners can exert certain managerialpowers -provided by the company’s articles of association or theGMS- for instance managing the company for a specific timeperiod. Both director and commissioner bear personal liability forIndonesian Legal System 141
  8. 8. Business Lawany fault or negligence committed in discharging his/her task.Although the UUPT does not define “fault” or “negligence”, it doeshowever acknowledge the concepts of fiduciary duties. In case ofbreaching any fiduciary duties, shareholders who control at least tenpercent of the issued shares with valid voting rights may, in thename of the company, bring a cause of action against the director orcommissioner for the loss suffered by the company. Since theshareholder initiates the legal action in the name of the company, itcan be considered derivative action. Pursuant to the UUPT, the shareholders of an Indonesiancompany are acting via GMS. The GMS has various rights, some ofwhich cannot be waived under any circumstances i.e. the right toapprove amendments of the company’s Articles of Association andto approve a dissolution or winding up of the company, while therest may be modified in the company’s Articles of Association.There are two types of GMS: annual and extraordinary meetings.An annual GMS is held within the last six months of the company’sfiscal year. The GMS convenes in order to approve the annualreport, including its annual accounts that must comply withIndonesian Financial Accounting Standards and the signatures ofthe directors and commissioners required for the annual accounts.The extraordinary GMS can be convened at any time that thecompany deems necessary for the purposes stipulated in the UUPTor Articles of Association. In other word, a company shallundertake an extraordinary GMS for the purposes other thanapproving the company’s annual account, such as: merges,acquisitions or appointment of a new Direksi. Commissioner,Director or a party that controls at least 10% of the issued sharesmay request the meeting.Minority Shareholders protection The UUPT grants minority shareholder a great deal ofprotections as all shareholders have pre-emptive rights – a right142 Indonesian Legal System
  9. 9. Business Lawallowing them to maintain or increase their proportionate shares inthe company before the company offers the shares to other parties.Another right comes from the provision that entitles the shareholderto control less than 10% of the issued shares with valid voting rightsto request the State Court to commence an investigation panel withrespect to the company in the event that the directors orcommissioners are suspected of having committed an illegal act thatcauses loss to the shareholders, third parties or the company itself.Mergers & Acquisitions Although the UUPT provides only eight articles governingmerges and acquisitions, it is still a remarkable change inIndonesian corporate context because there have been no specificregulations on such business activities since Indonesia’sindependence. It is expected that a more detailed provision will beissued subsequently. It is important to note that even though theUUPT introduces three terms: merge, amalgamation andacquisition, it is actually governed only by a statutory merge andshares of acquisition. There are four types of merges: shares, assets,contractual and statutory merge; whereas in acquisition there areasset and shares acquisition The term merger (“penggabungan”) refers to a company thatbecomes part of another existing company. While amalgamation(“peleburan”) refers to a transaction in which two companiesdissolve in order to form a new company. The difference between amerge and an amalgamation is in a merge a company dissolvesanother, whereas in an amalgamation both companies involveddissolve in order to create a new company. Acquisition(“pengambilalihan”) refers to a company or individual taking over acompany through a purchase of the latter’s shares. In this process,no company dissolves. A company involved in a merger,amalgamation or acquisition in general has to take two steps. First,the directors of the respective company prepare a proposal. TheIndonesian Legal System 143
  10. 10. Business Lawproposal must then be approved by the extraordinary GMS, whichmust satisfy the quorum and approval requirements. Shareholdersrepresenting no less than 75% of the issued shares with votingrights must attend the meeting, and approval must be given by 75%of those attending shareholders. Second, submit an approvedproposal to the Minister of Law and Regulation for the purpose ofreporting or approving the proposal. The UUPT also requiresmerges, amalgamations, and acquisitions to take into account theinterests of the minority shareholders and employees of thecompanies as well as the interests of the public and of competition.The right of the minority shareholders to sell their shares for anequitable price should also be protected. With respect tocompetition, the Elucidation states that in the even of undertakingmerges, amalgamations and acquisitions, a company should preventthe rise of a monopoly which goes against public interest.Dissolution The UUPT recognizes three ways a company can dissolve:decision made during a GMS meeting, upon the expiration of theperiod of existence specified in its articles of association and byorder of court. The court order to wind up the company (judicialinvestigation) can also be made by request from the prosecutor forrepresenting the public’s interest or a single shareholder holding notless than 10% of the voting rights. Once the company is wound-up,it must appoint a liquidator to liquidate the company. The directorwill act as the liquidator in the event that no liquidator has beenappointed.Proposed Revisions Revisions are aimed at unclear and ambiguous provisionssuch as:144 Indonesian Legal System
  11. 11. Business Law• the filling systems (registration) articles of association and amendments to the articles of association at the Ministry of Law and Regulation and the Ministry of Industry and Trade, should be simplified because it is complicated, expensive and time consuming. Even though the filling system has been computerized since 2004, however, it is still ineffective.• the articles of association should specify only the amount of authorized capital not the amount of paid-up capital or issued capital• the issuance of a share without nominal value should be permitted• the meaning of ‘substantial part’ of a company’s assets should be clarified• the meaning of acquisition should be made clearly in regards to terms such as: changing control, etc.Conclusion The promulgation of the UUPT, at that time, reflects thepolitical will of the Indonesian government to reform the corporatelegal framework to be in sync with modern commercial activity,thus generating greater legal certainty in the Indonesian corporatesector. Even though some parts of the UUPT are merely codified,due to existing practice or government policy, problems are stillencountered. The enactment of the New Company Law marks amajor step in the development of the Indonesian Company Lawframework. The new provisions in the UUPT that govern mergesand acquisitions, duties and liabilities of directors andcommissioners, and the rights of minority shareholders raise thecorporate governance issues in Indonesia. At last, the UUPT can beconsidered a unique legislation product because it combines bothcivil and common law concepts. On the one hand, it preserves civillaw concepts, such as the two-tier management structure and theIndonesian Legal System 145
  12. 12. Business Lawcompany (judicial) investigation, while on the other hand it alsoadopts common law traditions, such as provisions that deal with theduties of directors and commissioners. Hopefully, the proposedrevisions of this UUPT will create a legal certainty for the future ofIndonesian corporate law.B. CONTRACT LAWIntroduction The Indonesian commercial legal system is, basically,derived from the Dutch Civil Law traditions codified in theIndonesian Civil Code (Burgelijke Wetboek or Kitab Undang-Undang Hukum Perdata) and the Indonesian Commercial Code(Wetboek van Koophandel or Kitab Undang-Undang HukumDagang). The first code, however, serves as the basic legislationgoverning Indonesian contract law. Contract, is actually a part ofwhat the Indonesian legal system recognizes as the law ofobligation (hukum perikatan or verbintenissen), and is governed inBook III of the Indonesian Civil Code (“ICC”). The law ofobligation recognizes two sources of an obligation; namely, anobligation resulting from contract and an obligation resulting fromstatute. Pursuant to Article 1313 of the ICC, a contract or anagreement is defined as an act by which one or more individualsbind to one another. The term of “contract law” is then used todefine an obligation that arises as a result of this contract and isreferred to as a contractual obligation. Therefore, contract lawconstitutes one of the principal sources of obligations in Indonesianlaw. There are several principles with respect to contract law thatare important to understanding the operation of Indonesian contractlaw. First, the principle of freedom of contract – a principle that146 Indonesian Legal System
  13. 13. Business Lawrecognizes that each and every person has the right to enter intocontract so long as it does not breach the prevailing laws andregulations, accepted decency and moral standards, and publicpolicy. Second, the consensual principle – in essence a contract initself implies a meeting of minds, and from the moment thismeeting occurs a contract is formed. Thus, the consensual principleis a principle stating that a contract is considered to come intoexistence once the parties reach a mutual consensus. These twoprinciples form the basis of Indonesian contract law. Otherprinciples are contained in Book III of the ICC where Indonesiancontract law is referred to as “an open system”. Generally, this hasbeen interpreted to mean that the provisions contained in Book IIIare considered as an optional law, in which the parties are free tomake use of or ignore those provisions. As optional law the partiesare permitted to determine specific provisions regulating thecontract into which they will enter including agreeing to provisionsthat are expressly contrary to the optional law contained in Book III.In the event that the parties opt for a standard contract and have notmade any specific provisions in the contract to the contrary then theprovisions of Book III apply – this is referred to as the “defaultrule”.Elements of Contract Not all contracts constitute valid and binding contracts. Toestablish a valid and binding contract, there are four conditions tobe satisfied as follows:Consent of the Parties The consent of the parties to enter into a contract constitutesthe consensual principle and serves as the basis of contract law. Acontract is considered to have consent if approval by the parties ismade without duress, mistake or fraud (misrepresentation). DuressIndonesian Legal System 147
  14. 14. Business Lawinvolves an illegal mental threat including physical violence (butnot an action that is permitted by law to bring as a lawsuit),blackmail and excessive influence over a person in a weakenedmental state. Mistakes comprise of two types: concerning theidentity of the subject matter of the contract and concerning theidentity of the person that concluded the contract. Fraud is definedas a plain act performed by one party prior to the formation of acontract with the intention to deceive the other party and induce himto conclude the contract that he would not have concluded if he wasto be aware of the deception. In other words, one party concludesthe contract because of the deceitful act. Nevertheless, a contract may be valid even though consentwas obtained by duress, mistake, or fraud. In this case, the contractis considered to be a voidable contract, meaning that the contractcan be made void but only at law and on the bringing of asuccessful cause of action by the injured party. The suit has to befiled within five years of the cessation of the duress or within fiveyears of the discovery of the mistake or fraud.Capacity of the Parties The legal capacity of a party to conclude the contract servesas the second important requirement that must be satisfied before acontract can be considered valid. Generally, all persons are legallyeligible to enter into contract. Exemption is made to the followingpersons: a minor (a person under 21 years old, unless married), aperson under official custody, and a person prohibited by therelevant law to conclude a contract. A contract concluded by the above persons is considered tobe a voidable contract. It is possible that a contract of this naturecan be annulled by the court on the request of the incompetent partythat entered into the contract. The obligation of the other party,however, is unaffected by the incompetence unless or until thecontract is declared void. The nullification of contract based upon148 Indonesian Legal System
  15. 15. Business Lawthe incompetence of the individual mentioned above, shall cause theassets and the parties to be returned to the state they were in prior tothe entry into the contract, on the understanding, that anythinggranted or paid to the incompetent party, as a result of the contract,may only be reclaimed, to the extent that any such payment that isstill in the hands of the incompetent party, or to the extent it appearsthat the settlement of payment has been beneficial to him, or that hehas applied or extended the enjoyment to his use.Definite/Specific Subject Matter Third element of a binding contract is the specific subjectmatter. In general, anything that is tradable and determinable maybecome an object of a contract. A subject matter of a contract canbe comprised of rights, services, or goods whether existing now orin the future. Under the ICC, only existing goods are tradable.Future trading is governed by a separate law. For instance, the saleof 10,000kg of jasmine tea leaves at harvest time in 2005 for USD2/kg is considered sufficient to constitute a definite subject matter,but the sale of jasmine tea leaves for USD2/kg, does not constituteas a definite subject matter, and thus it is unacceptable.An Admissible Cause The last pre-requisite that must be satisfied for a validcontract to be created is an admissible cause. An admissible causemeans that the purpose of a contract must have a lawful ‘causa’. Acontract is considered to have a lawful causa or admissible cause ifthe object of the purpose of the contract breaches the existing lawsand regulations, accepted decency and good moral standards, andpublic policy. For instance, a contract regarding the trafficking inhumans would be considered to be an illegitimate contract as thepurpose is contrary to the prevailing laws and regulations.Similarly, a contract for sexual-service would be contrary to theIndonesian Legal System 149
  16. 16. Business Lawacceptable decency and moral standards and as such would bedeclared invalid. A contract that does not satisfy the third and forth elementsis considered to be null and void meaning that the law will hold thatthere is no valid and existing contract between the parties. Adecision of this nature by a court requires that the court also issuean order that returns the parties to their respective original statesprior to their entry into the voided contract.Contract Formation The Indonesian Civil Code does not recognize theories ofcontract formation in the same manner as that of common lawsystems, particularly as it does not define when parties to a contractconsented to be bound. Well established doctrines, however,provide that contract is considered to exist and therefore bind theparties when they have reached agreement; namely, when one part’soffer is accepted by the other party. It is generally held that contractis formed the exact moment when this acceptance is received by theofferor. In other words, a contract is created at the moment alegitimate offer has been accepted. The offer and acceptance can beexplicit or tacit. A written acceptance is effective upon receipt. Itshould be noted that a legitimate offer is irrevocable unless a powerto revoke has been reserved.Formalities As a general rule, there is no formal requirement for acontract to be written or registered before it is considered to bebinding on the relevant parties. However, there are some situationswhere a contract must be concluded formally – the contract must bein writing and executed by notarial deed. For example, everytransaction that deals with land, intellectual property rights, orincorporation of a limited liability company, must all be in writing150 Indonesian Legal System
  17. 17. Business Lawand registered in the relevant Registry Office. If a contract is to beused as evidence in a civil lawsuit, then the contract must have beenentered into under seal and the applicable stamp duty paid.Performance A valid contract shall bind the parties who have entered intoit and cannot be revoked unless by mutual agreement or pursuant toprovisions included in the contract, or for valid legal reasons. Thisserves as what the Indonesian contract law knows as the pacta suntservanda principle – a principle that states a contract binds only theparties entering into it. The parties, however, are not bound only bywhat the contract specifically provides, but also by the nature of thecontract, by reasonableness, custom, and statute. In addition, acontract shall not be detrimental or benefit a third party. Someexceptions, however, are made to conclude a contract that benefits athird party, for example, in the event of insurance. In insurance, athird party becomes the beneficiary of the contract. A contract must also be performed in good faith. In order topreserve the application of good faith, a civil case judge, who hasthe power to supervise the performance of a contract in accordanceto the principles of reasonableness and justice, may depart, ifnecessary, in rendering his decision from the contract provisions. All rights and duties arising out of a given contract pass tothe heirs of a party in the event of his death, unless the contractclearly provides otherwise.Breach of Contract (Default) An obligor, a contracting party who has to perform anobligation in a contract, should perform his obligation at the timeand in the manner agreed in the contract. Failure to do perform hisobligation would constitute a breach of contract or default. PursuantIndonesian Legal System 151
  18. 18. Business Lawto the Indonesian contract law, a party is considered to be in breachof contract if any one of these four conditions apply; namely, totalfailure to perform the obligation, failure to perform the obligation inthe time specified, failure to perform the obligation properly(contrary to the terms of the contract), and performs a prohibitedaction specified in the contract. Indonesian contract law provides various remedies thatcould be exercised against the breaching party, such as; specificperformance, damages or termination of the contract. Basically, theaggrieved party to a contract has the right to sue the breaching partyfor specific performance, if it is still possible or reasonable for thebreaching party to fulfill its obligations under the contract,especially in relation to the sale of land. Damages usually compriseof all expenditure in relation to the performance of the contract – allexpenses and costs actually incurred by the aggrieved party inreliance on the contract, loss – injury to the property of the creditorresulting from the default, and interest – lost profit. Provisionscontained in Book III of the ICC do not provide clear measures forcalculating monetary damages. It imposes limitations, however, onmonetary compensation. The debtor is liable only for the costs,damage, and interest which have been foreseen or which shouldhave been foreseen at the time of the formation of contract.Damages, however, are limited to the injuries which directly resultfrom the breach. In the event that performance is to be in the formof payment of money, the ICC permits the court to render a decisionon interest for late or non-payment with interest not to exceed 6%per year calculated from the date the petition was filed.Termination of contract Indonesian contract law recognizes ten ways of terminatinga contract; namely, by performance, by certified tender, bynovation, by compensation (set-off), by merger (confusion), byrelease, by destruction of the subject matter, by rescission, by152 Indonesian Legal System
  19. 19. Business Lawoccurrence of a canceling condition, and exceeding any statute oflimitation. Performance of a contract is the most common way ofterminating a contract, which denotes with the word ‘payment’.Generally, only the party concerned makes the payment, however, itis also possible to have a third party do so. If the third party doesthis without taking the creditor’s place, then the contract isterminated, whereas if the third party steps into the shoes of thecreditor, then it is known as subrogation. Certified tender plus deposit may discharge the contract inthe event the creditor refuses to accept payment. If the debtorwishes to make payment by offering money or movable goods (notimmovable goods), but the creditor refuses, then such money orgoods are to be deposited in the court at the responsibility of thecreditor. Novation occurs when the old contract is terminated and anew contract is born. It must be done explicitly and requires theconsent of both parties. Compensation occurs automatically if someone issimultaneously a creditor and debtor of another person and thecontract concerns a sum of money or a certain and similar quantityof goods. Thus, no special procedure or intervention of a third partyis required. Merger is a termination process whereby the positions ofdebtor and creditor unite in one person. This may occur when, forexample, the debtor marries the creditor or the debtor becomes theheir of the creditor. Release is a situation in which the creditor releases thedebtor from any obligation by conclusion of a new contract. Thedebtor has to accept the creditor’s offer to free him from theobligation.Indonesian Legal System 153
  20. 20. Business Law A contract concerning a delivery of goods is terminatedunder the following three situations: if the goods are destroyed, ifthe government issues a regulation prohibiting the sale of suchgoods, and if the goods are lost or become damaged in such a wayas to be unrecognizable. In order to terminate the contract, thedestruction of the goods must precede delivery and beyond theability of the obligor to prevent. Rescission occurs in the event that a contract concluded byan incompetent party is declared null or a contract in concludedbecause of duress, mistake, fraud or anything that violates the law,morals, and public order of the community, and is subsequentlyannulled. Occurrence of a canceling condition occurs in a contract bywhich a certain event is stated to be a cause of terminating thecontract. Therefore, if such event occurs, the contract is thenautomatically discharged. Running of the statute of limitations occurs thirty years aftereach and every contract comes into effect. The aggrieved party hasthe power to exercise his right to file a legal claim within 30 yearsof the date that the relevant contract came into force. If within suchtime he does not institute any such action, then pursuant to the ICC,all rights are discharged.Types of Contract Indonesian contract law recognizes two basic types ofcontract – general contract and special contract. General contractconsists of conditional contracts, temporal contracts, alternativecontracts, contracts giving rise to joint and several liabilities,divisible and indivisible contracts, and contracts that contain apunishment clause. Special contract, on other hand, comprises ofcontracts of sale, contracts of hire-purchase, contracts ofinstallment-purchase, contracts of lease, contracts of gift, contracts154 Indonesian Legal System
  21. 21. Business Lawof agency and representation, contracts of a free-loan, pledges andchattel mortgages, and contracts of warranty.Conclusion Although Indonesian contract law is still governed by BookIII of the Indonesian Civil Code inherited from the colonial period,people involved in the business sector including lawyers, advocates,judges, and the business community are relatively comfortable withthe existing legislation. Therefore, the demand for reform in theIndonesian contract law sphere does not seem as high as in otherareas of commercial law reform. Criticism was restricted to theimplementation and enforcement of contract relating to theefficiency of the judiciary area. Serious reform to secure properenforcement of commercial contracts is needed. Establishment ofnew specialized courts such as the commercial court or tax court isexpected to provide greater legal certainty with respect to theenforcement of contract.C. LAND LAWPreface The basic principles and provisions of the present landtenure structure in Indonesia can be found in the Basic AgrarianLaw, Law No. 5 of 1960 (BAL), which came into effect on 24September 1960. The nomenclature is a little misleading as theBAL does not only regulate agrarian matters it also regulatesIndonesia’s vast natural resources including minerals, territorialwaters, fish and other marine resources, oil and gas, space, andalmost all other natural resources deemed critical to the ongoingIndonesian Legal System 155
  22. 22. Business Lawnational development of Indonesia. Nevertheless, the BAL isgenerally referred to as the Land Law. According to the BAL, the pre-emptive and ultimate right isthe right held by the State (Hak Bangsa). The underlying premise ofthis concept is that all of Indonesia’s land and natural resources areowned by the people and as such the government of Indonesia asthe elected representatives of the people are empowered toadminister these vast lands and resources in the best interests of thecommunities and people that they serve. This right is all-encompassing in that it permits the State to regulate all mattersconcerning both publicly-owned as well as privately-owned landand resources and is often referred to as the Hak Menguasai Negaraor the Right of Control over the State. In Indonesia, Article 6 of the BAL states that all titles toland have a social function. This function is specifically that notonly is the holder of land entitled to make use of the land but is infact expected to utilize it in order to serve the general welfare of thecommunity. Based on the BAL, several implementing regulations havebeen enacted to regulate the land tenure structure in Indonesia,including different types of land titles, the rights and obligations oftitle holders, and measures to obtain title of land. The authority whohas jurisdiction with regard to land matters is the National LandInstitute (Badan Pertanahan Nasional/BPN). Besides BAL and its implementing regulations, customaryand Adat law still exist. However, these customary and traditionallaws are being consumed by the uniform application of the BALwhich has developed into the standard for the administration of landin Indonesia. Despite the BAL developing into the pre-eminent source ofland law in Indonesia there is a belief that the BAL enacted in1960is no longer reflective of the current community and public needswith respect to land law in Indonesia in the 21st century,156 Indonesian Legal System
  23. 23. Business LawType of Land Title and Their ParticularsPrimary and Secondary Titles of Land Under the BAL, land titles are divided into two categories;namely, primary and secondary titles. Primary Titles are derivedfrom the state and consist of: the Right of Ownership (Hak Milik),the Right to Till or Exploit (Hak Guna Usaha), the Right to Build(Hak Guna Bangunan), the Right of Use (Hak Pakai) and the Rightof Management (Hak Pengelolaan). All titles are required to beregistered or certified. Secondary titles are titles granted by othertitle holders and which are based on mutual agreement and consistof leases (hak sewa), the right of share cropping (hak usaha bagihasil), the right of land pledge (hak gadai) and the right of lodging(hak menumpang). The title holder of both titles has the same right to make useof the Land and to utilize it by himself/herself to extract a profitfrom someone else although this is traditionally based on anagreement by granting one of the secondary titles. Besides the aforementioned, there are also five importanttypes of land that must be acknowledged by companies who wish torun businesses in Indonesia. It must be noted that each of these titlesgive rise to different consequences.1. Right of Ownership (Hak Milik/HM) HM is the most complex form of ownership of land inIndonesia. It is subject to planning regulations, in which the holdercan use the land for any purposes, including for housing. It alsoentitles the holder to use the air space (the space above the land) aswell as the soil beneath it. However, HM does not allow the holderto exploit the natural resources found on or under the land as this isIndonesian Legal System 157
  24. 24. Business Lawa right that is regulated under the provisions of Law No. 11 of 1967on Mining. In principle, only individuals of Indonesian nationality andthe special legal entities stipulated in Government Regulation No.38 of 1963 (government banks, cooperatives, and religious andsocial bodies) can hold this title. Therefore, foreigners and legalentities, such as joint venture companies, cannot hold a HM title. There is no time limit on this title and it can be given orbequeathed to another, even on the holder’s deathbed. HM is alsoone of the titles that makes a person eligible for a mortgage inIndonesia (Hak Tanggungan).2. Right of Exploitation (Hak Guna Usaha/HGU) HGU is the principle title that applies to agricultural areassuch as plantations, fisheries, and cattle properties. A HGU isprovided by the State in order that a private legal individual orentity may utilize State-owned land. The holder is allowed to erectstructures so long as it is utilizing the land subject to the grantedHGU in some substantial and significant manner. In general, the right is granted for an initial maximum periodof 35 years for plantations, but can be extended for another 25 yearson the submission of an application seeking the extension. Theprevailing laws and regulations stipulate all necessary fees andcharges associated with the application for extension process. Thesepayments will be made to the State Treasury and constitute a formof non-tax revenue. The HGU right cannot be granted on areas of less than fivehectares and is not subject to any other limitations and large tracksof land are normally granted. However, in practice, the governmentwill not issue a right to a plantation if the proposed plantation areais less than 25 hectares.158 Indonesian Legal System
  25. 25. Business Law A HGU can be transferred and granted to another party andis eligible for Hak Tanggungan.3. Right of Building (Hak Guna Bangunan/HGB) The holder of this title is entitled to erect and possess astructure on the land. A HGB can exist on both State and privately-owned land. Most land in local areas is subject to a HGB grant fromthe government with respect to residential, commercial andindustrial land. The HGB title is also granted to most majordevelopment projects, such as energy and mining projects. The right is normally granted for an initial period of up to 30years and it can be extended for a further 20 years on application. Based on Government Regulation No. 40 of 1996, acompany, formed in the nature of investment, shall pay officialcosts (uang pemasukan) to the State Treasury for a period of 80years which is inclusive of the initial 30-year grant, the 20-yearextension and an additional renewal for a further 30 years after theissue of the HGB title by the relevant authority. The title is alsoeligible for Hak Tanggungan.4. Right of Use (Hak Pakai/HP) A HP is granted against specific plots of State or privately-owned land in order that the holder of the HP title may exploit theland for productive purposes. In practice, the right is usually onlygranted to enter a lease or some other equivalent set of terms ofagreement, rather than going through the formality of granting theright. The right can be held by Indonesian individuals or legalentities as well as by foreign residents for a maximum of 25 yearsand it can also be extended for another 20 years.Indonesian Legal System 159
  26. 26. Business Law5. Right of Management (Hak Pengelolaan/HPL) A HPL is given to State-owned companies and RegionalGovernments with respect to planning and development of State-owned land. It is usually given to those who will use the land forindustrial and/or business purposes. The holder has the power togrant a HGB and a HP. Many examples exist of the use of the HPLgrant such as the Pulogadung Industrial Estate and some low-costhousing projects including those developed by the State HousingCompany. The time period of the HPL is in accordance with the time inwhich the holder intends to use it for industrial and/or businesspurposes. This right is not eligible for Hak Tanggungan.Unregistered Titles of Land Besides the rights defined in the BAL, in rural areascustomary land titles, which are not registered, still exist. One ofthem is the Customary Right of Ownership (Hak Milik Adat), whichby law has to be converted to a registered Hak Milik and must beregistered since 24 September 1960. In Central Java, particularly inJepara, the Hak Milik Adat is called Hak Yasan and is referred to as“Letter C”. This right is known in West Java as “Girik”. In additionto Hak Yasan, there is also Village Land (Tanah Bengkok or “TanahJabatan”), which is given to and can be used by the Head of theVillage (Kepala Desa) during his/her tenure in office. Theoretically, Tanah Bengkok cannot be sold since it isregarded as “salary” for the Kepala Desa, thus it can only bepossessed and used during the term of office. However, in the eventthat this land is needed for the purpose of development, it can besold under Village Decree (Keputusan Desa/Rembug Desa) andconfirmed thorugh Governorial Decree.160 Indonesian Legal System
  27. 27. Business LawThe Land Acquisition ProcessLand Acquisition Methods Three things must be taken into consideration whenobtaining land: the status of the land, the status of the individualwho will acquire the land, and the willingness of the title holder tosurrender the land. In regards to the status of land, there are two kinds of land inIndonesia, State and private.1. State Land The only way to obtain State land is to apply for the relevant land title through an authorized state official, as stipulated in the regulation of the Department of Home Affairs No. 6 of 1972. To obtain a land title, applicants are required to pay the associated land taxes, which is 5% of the value of land and buildings minus IDR 30 million. In addition to the PPHTB (Pajak Penghasilan atas Pengalihan Hak atas Tanah dan/atau Bangunan - Income Tax over Transfer of Land dan/or Building), they are also required to pay the all other official costs to the State in accordance with State Minister for Agrarian Affairs/Head of the National Land Institute Regulations No. 4 and 6 of 1998. The procedure for granting a land title is stipulated in the Minister for Home Affairs Regulation No. 5 of 1973 and which has been amended by the regulations of State Minister for Agrarian Affairs/Head of National Land Institute No. 2 of 1993 and has recently been further amended by Minister of State for Agrarian Affairs/Head of BPN Regulations No. 2 and 3 of 1999.2. Private Land There are four legal methods to obtain private land, but it depends on the individual who wishes to posses the land as well as the type of title that they desire. The methods are:Indonesian Legal System 161
  28. 28. Business Law a. Available land which is based on an agreement with the title holder (such as a lease agreement) is usually used on the condition that a party wishes to use a small plot of land over a short period of time, say between 3-10 years, thus it is considered to not be necessary to posses a strong title over the land. b. If done by direct transfer, such as sale and purchase or exchange of land, the status of the individual who wishes to posses the land will be evaluated and taken into consideration. This is to avoid the possibility that the transfer will become null or void at law, thus making the particular land subject to this agreement the property of the State. A direct transfer is frequently used for sale and purchase. c. Indirect transfers or the relinquishment of land title is used when a company wishes to posses land, but is not eligible to hold the title. An example of this is a company that is trying to obtain both the title of Hak Milik and Hak Milik Adat. In order to possess these titles, the owner of the land must first release his/her title over the land in exchange for an agreed price that is to be paid as part of a sale and purchase transaction. The owner then declares that s/he has released the title over the land. This release should be in written form of a Notarial Deed and or at a minimum witnessed by a notary and confirmed by relevant State appointed body. The declaration states that the owner releases title over the land for the benefit of the company. It is preferred that the declaration be made before the Head of the Regional Land Office, who will then draft a new Deed. Additionally, in order to subvert the possible rejection of the release of title by the relevant State authority the Deed of Release usually includes a clause that expressly states that in the event of rejection that the owner permits the company to transfer the “rights” to any other qualified party. Thereafter, the request162 Indonesian Legal System
  29. 29. Business Law for the appropriate title should be submitted to the local Agrarian Affairs Office and the process is then complete on the issue of a certificate. The grant of land title in this procedure does not require the payment of any uang pemasukan to the State Treasury since the company has paid the price of the land to the owner, but there is an administration fee charged by the relevant local authority that must be paid. d. Expropriation – this is the last method that can be used for the purposes of obtaining land for the public’s benefit. Expropriation requires that the relevant parties, the owner and the individual who wishes to obtain the land, enter into negotiations in order to reach an agreement. In the event the parties fail to reach a mutually acceptable agreement with regards to terms and conditions to effect transfer then the law would allow for an expropriation of the property to occur. The expropriation principles are explicit that the State is subject to the law and as such must respect the rights of the individual and as a result the BAL stipulates a number of strict provisions that must be satisfied before expropriation can occur; namely, Article 18 of the BAL states that: (a) the land will be used in order to fulfill the public interest, (b) the expropriation must be accompanied by proper compensation, and (c) the expropriation must be executed based on a Presidential Decree. Once expropriation has occurred then the new owner of the land must submit the relevant applications to the relevant bodies to secure appropriate title over the land.Land Acquisition for Companies in the Framework of CapitalInvestment The emergence of fierce competition between developingcountries for foreign investment and the plain link between foreignIndonesian Legal System 163
  30. 30. Business Lawinvestment and the need to acquire title in land spurred thegovernment to improve and simply the land acquisition process forforeign investors. According to the new regulation, Minister of State forAgrarian Affairs/Head of BPN Regulation No. 2 of 1999, in orderto acquire land in accordance with the Regional Spatial Lay OutPlan, a company must be granted a location permit (izin lokasi),which is only valid as a transfer title permit.Foreign Ownership Land/Property Under Government Regulation 41 of 1996 (GR 41/1996),foreign residents in Indonesia, foreign companies withrepresentative offices in Indonesia, representatives of foreigncountries (Embassies and Consulates), and representatives ofinternational organizations are among the few categories of peoplewho can hold Hak Pakai. The definition of foreign residents, asdefined in GR 41/1996, is “foreigners whose presence in Indonesiagives opportunities to national developers”. Unfortunately, thisdefinition is able to be so broadly construed that any sort of uniformapplication is almost impossible to effect.D. CAPITAL MARKET LAWIntroduction The essence of the capital market, in general, is the same asthat of a conventional market; namely, a place where sellers andbuyers meet to transact. The capital market’s primary function is tofacilitate meetings between the supplier of funds and the users offunds where the underlying aim is to finalize either a mid to long-term investment. According to Article 1(13) of Law No. 8 of 1995,164 Indonesian Legal System
  31. 31. Business Lawthe Capital Market is the forum for the activities of trading andoffering securities to the public, as well as to supervise the activitiesof public companies that have offered securities to the public, aswell as the supervision of the activities of securities relatedinstitutions and professions. The activities of the Indonesian capitalmarket will be defined below. The capital market is not a new development in Indonesia.On the contrary, the activities related to the trading of stocks andbonds have been a familiar line of business in Indonesia since the19th century. The book, Effectengids, published by Verreniging voorden Effectenhandel in 1939, states that the trading of stocks hasoccurred since 1880. However, the major difference between thetrading activities of the past and the trading activities of today isthat the buying and selling of stocks and bonds in the late 19thcentury occurred without an official trading floor. Nevertheless,even an official trading floor is not something that is new toIndonesia as the Indonesian Capital Market of the early 20th centuryestablished the first official trading floor on 14 December 1912 inBatavia (now Jakarta). In the period between 1912 and 1925 therewas significant growth in the capital market and the amounts ofstocks and bonds being traded, this growth was the driving forcebehind the establishment of the Surabaya trading floor on 11January 1925 and the Semarang trading floor on 1 August 1925.Currently, in 2005, there are two trading floors – Jakarta andSurabaya. The Indonesian Capital Market closed during World War IIas a consequence of the complete deactivation of the world’sCapital Market systems and also because of the belief that it wasneither feasible not possible to engage in capital market activitiesduring a war. After the war the government enacted EmergencyLaw No. 13 on 1 September 1951, this was later confirmed as LawNo. 15 of 1952 on the Stock Exchange. This led to the reopening ofIndonesia’s Stock Exchange on 1 September 1952 after a closure of12 years. The law mandated the appointment of staff to the StockIndonesian Legal System 165
  32. 32. Business Lawand Financial Trade Association and this management comprised of3 State banks and several broker-dealers and Bank Indonesia asadvisor. However, the Stock Exchange survived only 6 years asIndonesia suffered heavily under a sluggish domestic andinternational economy and declining world-wide stock activities.Another notable cause for the declining stock exchange was theconfrontationalist policies the government had adopted towards itsformer colonial masters, the Netherlands. The end result of thispolicy was that the majority of the remaining Dutch citizens andtheir business interests in the community chose to leave taking asmuch of their capital and investment with them. This situation continued to deteriorate and was furtherexacerbated by tension between Indonesia and the Netherlands overWest Irian as well as the nationalization of Dutch companies stillwith business interests in Indonesia. The nationalization of Dutchfirms was based on Law No. 86 of 1958 on Nationalization and aninstruction from BANAS (Badan Nasionalisasi PerusahaanBelanda) that prohibited the Indonesian Stock Exchange fromtrading any remaining Dutch company’s stocks and to cease alltrade in Dutch firms whose stocks were denominated in Dutchcurrency. This led to a number of other related problems including therapidly increasing rate of inflation that was seriously reducing thepublic’s trust and belief in the the financial markets of Indonesia.This inflationary pressure resulted in a significant depreciation ofthe Rupiah and the rapidly deteriorating economy which culminatedin the political turmoil and tragedy that was to befall Indonesia in1965-1966. After the closure of the Indonesian Capital Market in 1952there had been an almost constant ebb and flow. Finally, in 1976through the issue of Presidential Decree No. 52 of 1976, theIndonesian Capital Market Supervisory Agency (Bapepam) wasestablished and was granted the following duties and functions:166 Indonesian Legal System
  33. 33. Business Law1. Evaluate whether the companies that are to sell their shares through the capital market have complied with the requirements and are sound and fit;2. Organize an effective and efficient capital market;3. Extensively supervise the development of Issuers It was anticipated that these duties and functions granted toBapepam would allow for the creation of an orderly, fair, andefficient capital market that was able to protect the interests of boththe public and investors. These duties and functions are similar tothe main tasks granted to the Securities Exchange Commission(SEC) in the United States. Finally, to clarify and strengthen these duties and functionsthe government enacted Law No. 8 of 1995 on the Capital Market(Capital Market Law). Bapepam falls under the auspices of theDepartment of Finance and the Chairperson of Bapepam isappointed by the President and reports to the Minister of Finance.The Indonesian Capital Market The Indonesian Capital Market has undergone significantgrowth since it was reestablished. Today, the Jakarta and SurabayaStock Exchanges have become the central features of theIndonesian Capital Market with each retaining their own distincttrading floor characteristics. Initially, both floors relied on manualtransaction systems however the recent automation of the Jakartatrading floor with the introduction of the Jakarta AutomatedTrading System (JATS) has resulted in much larger volumes oftrade and accountability. The JATS is a transaction system design tobe integrated with the clearing and settlement system as well asintegrated with the depository system to improve accountability andtransparency in transactions from which it is hoped that the public’trust and belief in the system will drive future trading growth. Theclearing and settlement system is managed by Indonesian ClearingIndonesian Legal System 167
  34. 34. Business Lawand Guarantee Corporation (KPEI) and the depository system ismanaged by Central Securities Depository Agency (KSEI). The Indonesian capital market community comprises notonly of Bapepam as the supervisory agency, but the Clearing andGuarantee Corporation and the Central Securities DepositoryAgency, both of which are Self Regulating Regulatory Bodies.However, the Law in fact mandates that under the auspices ofBapepam there are 4 self-regulatory bodies; namely, the Jakarta andSurabaya Stock Exchanges, the Clearing and GuaranteeCorporation, and the Central Depository Agency. The four SelfRegulatory bodies are privately-owned companies whose shares areowned by the Capital Market community. The Jakarta StockExchange and the Surabaya Stock Exchange were established notlong after the Indonesian Capital Market was reestablished, whereasthe Indonesian Clearing and Guarantee Corporation and CentralDepository Agency were established based on the Capital MarketLaw. The Indonesian Clearing and Guarantee Corporation (KPEI-Kliring dan Penjaminan Efek Indonesia) was founded to provideclearing and guarantee services in the settlement of stock exchangetransactions in an orderly, fair and efficient manner. The KPEI wasestablished as a limited liability company based on Deed ofEstablishment No. 8 dated 5 August 1996 in Jakarta by the Jakartaand the Surabaya Stock Exchanges, with each holding 90% and10% respectively of the founding shares issued of IDR 15 billion.The KPEI received its confirmation as a legal entity from theMinister of Justice of the Republic of Indonesia on 24 September1996 and on 1 June 1998 it received the relevant license to operateas a Clearing and Guarantee Corporation based on Decision LetterNo. Kep.-26/PM/1998 of the Capital Market Supervisory Agency(Bapepam). Although formed and operating as a corporation, theKPEI is in fact a non-profit organization as all of its revenues areallocated to finance its operations, while its net profit, if any, isfully retained towards the continuity of its mission.168 Indonesian Legal System
  35. 35. Business Law The Central Depository Agency (KSEI-Kustodian SentralEfek Indonesia) was established pursuant to the provisions of theCapital Market Law and its main duties and functions are to provideorderly, appropriate, efficient central custodian and transactionsettlement services. The KSEI was established on 23 December1997 and obtained the necessary licenses to commence fulloperations on 12 November 1998. Aside from the Capital Market Law there are a number ofother regulations that govern the operations of the IndonesianCapital Market:1. Government Regulation No. 45 of 1995 on the Implementation of the Activities of the Capital Market activities (this regulation revoked Presidential Decree No. 53 of 1990 on the Capital Market)2. Government Regulation No. 46 of 1995 on the Procedure of Investigation in the Capital Market3. Ministry of Finance Decision No. 645/KMK.010/1995 revoking Ministry of Finance Decision No. 1548/KMK.013/1990 on the Capital Market and since amended by Ministry of Finance Decision No. 284/KMK.010/19954. Ministry of Finance Decision No. 646/KMK.010/1995 on Stock Ownership or Mutual Funds for Foreign Investors5. Ministry of Finance Decision No. 647/KMK.010/1995 on Stock Ownership for Foreign Investors (up to a maximum of 85% of the capital stock)6. Ministry of Finance Decision NO. 455/KMK.010/2003 dated 17 July 2003 on Capital Requirements for Brokerage Firms7. All Regulations issued by Bapepam since 17 January 1996Indonesian Legal System 169
  36. 36. Business LawCurrent Activities in the Indonesian Capital MarketA. Scripless Trading In July 2000, the Indonesian Capital Market commencedScripless Trading to enhance market liquidity and to eliminate theoccurrence of lost and forged stocks as well as to simplify theprocess of transaction settlement. The introduction of Scripless Trading has meant that allprevious transactions that relied on paper to be transacted have beeneliminated and replaced with a computer-based electronic systemallowing both the transaction and subsequent settlement to occurelectronically. The owner of shares will only have a confirmation ofthe record and the status of the relevant shares. The implementationof scripless trading itself has led to a reduction in white collar crimewithin the Capital Market, particularly related to the handling ofshare certificates. The Capital Market Law allows for theimplementation of a scripless trading system, although it isimportant to note that scripless trading is not specifically addressedin the Law. Article 55 of the Capital Market Law simply states thatsettlement may occur in a number of different ways, such as book-entry, physical delivery or other means stipulated in GovernmentRegulations. However, the Elucidations to this Article do state thatelectronic settlement or settlements using new technology may beutilized to effect settlement. The remainder of the regulatoryframework with respect to scripless trading has been issued byBapepam, the Central Securities Depository Agency, and theIndonesian Clearing and Guarantee Corporation. Scripless trading is a feature of the Jakarta Stock Exchangein comparison the Surabaya Stock Exchange currently prefers aRemote Trading system. However, since 2002 the Jakarta StockExchange has also allowed Remote Trading as a means to increasemarket access, market efficiency, and simply the procedures relatedto trading and the frequency with which trades may be made.170 Indonesian Legal System
  37. 37. Business LawB.The Capital Market and Islamic Law (Sharia) As a country with the biggest Moslem population in theworld it is hardly surprising that Indonesia is not only open tofinancial and banking activities based on Islam nor is it surprisingthat financial services based on Islam are offered to the public. Thefirst significant move towards the provision of financial servicesbased on the principles of Islam saw the establishment of BankMuamalat Indonesia in 1990. This was quickly followed by theestablishment of a number of other banks offering similar servicesand visions of Islamic based financial services. The rapid development of Sharia based financial serviceshas seen Memorandums of Understanding (MOU) signed betweenBapepam and the Sharia National Committee-Majelis UlamaIndonesia (Dewan Sharia Nasional-Majelis Ulama Indonesia- DSNMUI) on 14-15 March 2003 regarding the provision of Sharia basedcapital market services. Later, the Sharia National Committee alsosigned another MOU with Jakarta Stock Exchange for the provisionof Sharia based share trading activities. To implement the provisions of the MOU, the Jakarta StockExchange and PT. Danareksa Investment Management establishedthe Jakarta Islamic Index (JII). The primary purpose of the JakartaIslamic Index is to act as a benchmark in measuring marketactivities based on Sharia. Currently, there are approximately 30corporate stocks listed on the JII. There is a fundamental difference between the conventionalcapital market and the capital market based that is based on theprinciples of Sharia. The concept of short selling on the capitalmarket is neither a principle nor an acceptable means of transactingon the Sharia based capital market. The Sharia based capital market,in general, focuses on long-term investments. Furthermore, stockownership means that all profit and loss is accepted as a mutual riskof the investment and assumed jointly between all stock holders.Indonesian Legal System 171
  38. 38. Business Law In addition to the stocks that are issued within the Shariabased capital market system there are Sharia bonds. Sharia bondsare based on a number of acceptable Sharia principles; namely,akad (agreement) and mudharabah (profit-sharing). The Nisbah orthe percentage of profit sharing will be stated before the agreementsare executed. Finally, the Sharia based capital market also offersSharia based mutual fund investments. Despite having the largestMuslim population in the world many of the financial servicesbased on Sharia principles remain in their infancy in terms ofpopularity compared to other non-Sharia based financial services.Nevertheless, it is important to recognize that this is a rapidlygrowing segment of the capital investment community as thecommunity becomes more aware of and comfortable with thequality of the investment options offered.E. BANKING LAWIntroduction In Indonesia, the banking industry constitutes about 93% ofthe total assets of the entire financial industry of Indonesia and theremaining 7% is spread among players in the non-banking industrysuch as insurance and multi finance corporations. The largepercentage of these funds held by the banking sector is intricatelylinked and can trace its origins to Minister of Finance Decision No.1062/KMK.00/1988 on the Establishment of State Banks, RegionalDevelopment Banks, National Private Banks, and CooperativeBank. This Decision led to a huge increase in the number ofoperating and established Banks. A brief overview of the dataindicates that in October 1988 some 124 banks were establishedincluding 13 Non-Bank Corporations. This number further172 Indonesian Legal System
  39. 39. Business Lawincreased during the period from 1988 to 1997 where the number ofestablished banks increased from 124 to 240 banks. In mid-1997, the effects of the Asian monetary crisis andeventual meltdown of a number of regional economies commencedwith the rapid depreciation of the Indonesian Rupiah (IDR) andworsened as a result of the political turmoil that plagued 1998 andhas continued in varying degrees through to 2005. The depreciationof the IDR quickly consumed the Indonesian banking sector andmany of the banks established in during the period from theconfirmation of the Ministerial decision were now in danger ofcollapsing or had already collapsed. As banks collapsed they werebeing bailed out by Bank Indonesia, initially as a means to protectcustomer’s savings and deposits but as time went on BankIndonesia quickly realized that the financial bailing out of insolventinstitutions was too costly to continue to pursue on a large scale.The financial crisis was felt hardest by bigger banks who wereholding considerably larger amounts of offshore borrowings andlarger percentages of non-performing loans and bad debt. Smallerbanks were not immune to the financial crisis occurring aroundthem but carrying much less bad debt and non-performing loans asa percentage of the assets meant that they were better able toweather the circling financial storm.Banking Law in Indonesia Indonesian Banking Law has a long history and Widjanartoclassified these periods of history into nine distinct phasescommencing with the end of Dutch colonization through to theperiod of 1988-1993. The Banking Law in Indonesia can trace itspost-colonization roots to Government Regulation in Lieu of Law(Perpu or Interim Law) No. 2 of 1946 which created Bank NasionalIndonesia (BNI). In 1953, Law No. 11 on Bank Indonesia wasenacted. Law No. 11 of 1953 was then amended by Law No. 13 of1968 on the Central Bank. However, in 1999, the GovernmentIndonesian Legal System 173
  40. 40. Business Lawenacted another new law, Law No. 23 of 1999 on Bank Indonesiasince the previous law was considered to no longer represent thecurrent status of the banking sector in Indonesia and rather thancontinue to amend the original law to ensure that it remain relevantand enforceable it was determined that the best means to modernizethe banking law was to draft and enact a new law therefore a newlaw was drafted and enacted and the old banking law was repealedin its entirety. Banking activities in Indonesia are governed by Law No. 14of 1967 on Banking as amended by Law No. 7 of 1992. In 1998, afurther series of amendments to the Banking Law were contained inLaw No. 10 of 1998. The general financial crisis afflicting Indonesia was keenlyfelt in the over-exposed banking sector as the IDR continued itsrapid depreciation against the United States Dollar (USD). A largenumber of banks had immediate liquidity problems and quicklybecame insolvent and despite this insolvency many continued to goabout business as normal waiting and hoping that the governmentthrough the Central Bank would bail them out. During this period ofrapid decline in the public confidence of the Indonesian bankingsector the government elected to provide liquidity funds to bankswhich it considered to be critical to the recovery of he sector in thefuture. Many of the smaller banks in liquidity trouble were either tobe consolidated into larger merged banks or liquidated. Thegovernment restructuring program for the banking sectorcommenced in 1998 and included the following:1. the injection of government capital into viable banks through the issuance of recapitalization bonds;2. the introduction of a blanket guarantee;3. the establishment of the Indonesian Bank Restructuring Agency (IBRA);4. corporate restructuring;174 Indonesian Legal System
  41. 41. Business Law5. improvement of corporate governance; and6. bringing supervisory and regulatory practices closer to international standards. The roots of the problem in that precipitated the Indonesianeconomic crisis related to non-performing loans and considerablelevels of offshore foreign debt held by both the private and publicsectors. To understand how it was possible to carry so muchoffshore foreign debt and non-performing loans requires only abrief examination of corporate governance principles and practicesin Indonesia prior to the crisis with respect to credit and riskanalysis it was invariably lacking in most cases and non-existent inthe others. In February 1993, Booz Allen & Hamilton forecast thatproblem loans (both under and non-performing) held by Indonesianbanks would constitute somewhere in excess of 20% of alloutstanding loans based on its analysis of figures from 1990through to 1992 which indicated a significant increase in thpercentage of poor and non-performing loans – 6% in 1990, 11% in1991, and 17% in 1992. In an attempt to deal with the continuing financial andbanking crisis the government devised and commencedimplementation of a comprehensive restructuring plan in 1999. Theestablishment of the Indonesian Bank Restructuring Agency(IBRA) at the end of January 1998 was intended to ensure adequatepolicy direction and supervision of the restructuring process. IBRAwas created and established through the enactment of Perpu No. 17of 1999 on the Indonesian Bank Restructuring Agency. The primaryduties and functions of IBRA pursuant to the Perpu are:(i) verify customer claims under the blanket guarantee scheme;(ii) dispose of assets from banks that have been taken over;(iii) restructure and sell loans transferred from banks; and(iv) divest government ownership in recapitalized banks.Indonesian Legal System 175
  42. 42. Business Law Aside from the establishment of IBRA to strengthen thesupervision of banks, Bank Indonesia (BI) was trying to manageand integrate its supervisory functions with that of IBRA.Statements at the time indicated that BI was fully aware that thebanking crisis stemmed from weaknesses in its own performance ofthe supervision of banks. To overcome these deficiencies BI hasbeen concentrating and refocusing its initiatives on the followingaspects:• harmonizing the organization of bank supervision procedures, particularly regarding structure and responsibility;• improving bank supervision management including, but not limited to, more efficient and transparent supervision, more competent supervisors, accountability and recognition, as well as reward and enforcement;• introducing risk-based supervision;• rectifying prudential regulations with emphasis on risk control. Other efforts have also been undertaken to improve thestability of the Indonesian banking system, such as the introductionof new banking and central banking laws, particularly the newBanking Law of 1998, which:• transferred the authorization for bank licensing from the Minister of Finance to BI;• relaxed the limit on foreign ownership of Indonesia- incorporated banks, raising it to 99%;• encourages the development of Sharia banking;• narrowed bank secrecy provisions to cover only the information on deposits (name and amount) instead of total assets and liabilities;176 Indonesian Legal System
  43. 43. Business Law• provides for more comprehensive and stricter criminal sanctions, and determines their minimum levels;• provides for the establishment of a deposit protection scheme by 2004 at the latest;• provides for the establishment of a temporary special agency to assist with the banking restructuring program. The Indonesian government introduced the Act on ForeignExchange Traffic and the Exchange Rate System in 1999 whichprovides a legal basis for monitoring the flow foreign currencyexchange and improves the ability to enforce prudential provisions.The law requires banks to submit to BI a report containing themovement of financial assets and liabilities between residents andnon-residents. Complete, accurate and timely reports that include allpertinent information regarding foreign exchange flows as a meansof supporting a prompt monetary policy response. This is primarilyto ensure that the stability of the Rupiah is maintained. Information Technology (IT) is a critical reform anddevelopment issue for Indonesian banks and the banking sectorgenerally. Overall, the utilization of IT and technology generallythroughout the Indonesian banking sector was best described aspoor however a recent drive towards simplifying and facilitatingpersonal and corporate banking has seen a rapid increase in the useof IT. This development has been so rapid that the primary responsefrom BI to ensure that the regulatory framework is in place to dealwith the new issues that will arise is to issue Circulars enumeratingpolicy and regulatory standards. It is expected that most of theseCirculars will eventually be enacted into law to provide greaterlegal certainty. One of these IT developments that has had animmediate and significant impact on the Indonesian bankingindustry is ‘Internet banking’. To address this rapidly developingarea of banking services BI issued Circular No.6/ 18 /DPNP, dated20 April 2004 on the Implementation of Risk Management inInternet Banking Activities. The Circular from Bank Indonesia is inIndonesian Legal System 177
  44. 44. Business Lawessence a set of guidelines that banks should follow and implementas part of their respective IT policy.Sharia Banking In Indonesia Today, the Indonesian banking system also recognizesSharia banking. Although Sharia banking has been a part ofIndonesian banking services for some years the development of aSharia banking system has only recently come to the fore as asignificant alternative to traditional banking methods and practices.The driving force behind Sharia banking and financial servicesdevelopment is clearly demand from the public for appropriatebanking and financial services that comply with the strict Shariabanking and financial principles. In response to these demands thecurrent law through amendments to Law No. 7 of 1992 on Bankingas amended by Law No. 10 of 1998, and finally Law No. 23 of1999 on Bank Indonesia is a legislative attempt to regulate Shariabanking and banking practices. Since the enactment of the legislation defining andregulating Sharia banking there has been considerable rapid andsustained growth of 74% annually. Bank Indonesia’s primaryfunction, as the banking regulatory authority, is to ensure thedevelopment of a sound Sharia banking system and set of governingprinciples. The banking and financial crises of 1997 and 1998highlighted that the sound fundamentals of the Sharia bankingsystem allowed it to weather the financial and banking crisis muchbetter than the traditional banking alternatives. The main reasonbehind this better performance relates to the rates of return that arepaid to depositors as they are not based on strict market ratesallowing Sharia banks to channel relatively lower fund managementcosts back to their clients.178 Indonesian Legal System
  45. 45. Business Law According to the Blueprint for Islamic BankingDevelopment in Indonesia issued by Bank Indonesia, Shariabanking development should be conducted in accordance with theactual needs and expectations of the stakeholders of the Shariabanking sector in Indonesia that includes:• Sharia commercial banks, Sharia banks, and Sharia rural banks• Bank Indonesia as the banking regulatory and supervisory authority• National Sharia council (DSN)• Muamalat Arbitration Board (BAMUI)• Other Sharia financial institutions: Takaful (Sharia insurance), Baitul mal wat Tamwil, BAZIS, and Sharia securities companies• Other regulatory bodies: Department of Finance and the Capital Market Supervisory Agency (BAPEPAM)• Universities/educational institutions concerned with developing training programs on Sharia finance and economics• Organizations and companies related to Sharia economic and finance such as: the Sharia Economic Society (MES), Association of National Sharia Banks, the Jakarta Stock Exchange, and vendors, among others.• The general public Further, the strategic objectives of the Sharia bankingdevelopment include:• Maintaining a high level of competitiveness while complying with Sharia principles• Playing a significant role in sustaining the national economy and public prosperityIndonesian Legal System 179
  46. 46. Business Law• Global competitiveness through compliance to international operational standards However, the success of Sharia banking development fullydepends upon the stakeholders. Therefore, a uniform vision andproper coordination are the keys to success and the factors mostlikely to support sustainable Sharia banking development in thefuture.F. SECURED TRANSACTIONS LAWIntroduction In Indonesia Hak Tanggungan (Indonesian Security Rightupon Land or mortgage) and Fiduciary Security are now two widelyused forms of security, especially since both are already regulatedunder Indonesian law with the implementation of Law No. 4 of1996 on Hak Tanggungan and Law No. 42 of 1999 on FiduciarySecurity (Undang-Undang Hak Tanggungan/ “UUHT”). While HakTanggungan is only over immovable property, land and land relatedobject, the fiduciary security is designed to cover moveableproperty either tangible or intangible and also immoveable propertythat can not be encumbered with the Hak Tanggungan.Hak Tanggungan1. Definition and Object of Hak Tanggungan One method of securing obligations is by a mortgage.Unlike other mortgages, which also include a pledge where acreditor can occupy the property encumbered with the relevantmortgage, the Law of Hak Tanggungan only provides the creditor180 Indonesian Legal System
  47. 47. Business Lawwith an in jure right which means that there is no immediateoccupancy right attached to the mortgage. On 9 May 1996 the Indonesian Government enacted LawNo. 4 of 1996 on Hak Tanggungan. This new law repealed theprevious hypothec provisions contained in the Indonesian CivilCode in so far as it related to land and other assets related to themortgaged land. In Indonesia, the Hak Tanggungan on land and land relatedfixtures is the only security right under which a land title is placedas defined in the Basic Agrarian Law (“BAL”) with or withoutother fixtures forming a totality with the land for security of aparticular loan, which gives priority to a particular creditor overother creditors. The Hak Tanggungan shall give the right to thecreditor to sell the land through a public auction without therequirement of a court order permitting it to do so, as the certificateof Hak Tanggungan serves as a court order. The land title which can be placed by Hak Tanggungan are(1) Hak Milik (right of ownership); (2) Hak Guna Usaha (right totill or right to exploit); (3) Hak Guna Bangunan (right to build); (4)Hak Pakai (right of use) and (5) Hak Milik atas Satuan RumahSusun (Strata Title). Hak Tanggungan can also be attached to theland including the buildings and fixtures on that land.2. Procedures for Placing and Registering a Hak Tanggungan The formal procedures for placing and registering a HakTanggungan can be described as follows:1. The creditor and debtor sign a credit agreement simultaneously. The debtor or the title holder of the land then signs either a power of attorney to encumber the Hak Tanggungan (Surat Kuasa Membebankan Hak Tanggungan or “SKMHT”) or a Deed granting the Hak Tanggungan (Akta Pemberian Hak Tanggungan or “APHT”) before the relevant Land DeedIndonesian Legal System 181
  48. 48. Business Law Official (Pejabat Pembuat Akta Tanah or “PPAT”). The APHT must clearly identify the plot or plots of land being used as security and the total amount of the loan being secured. Any buildings, plant or others fixtures attached to the land sought to be covered in the Hak Tanggungan must also be specifically described in the APHT.2. Within 7 (seven) working days as of the date of the APHT, the PPAT must submit the APHT and Land certificate to the Local Land Officer to register the Hak Tanggungan.3. On the 7th calendar day following the receipt of the APHT and land certificate by the Local Land Officer, they must issue the Hak Tanggungan land book and note the date of registration. By law, at this stage, the Hak Tanggungan will be effective and will provide the creditor with the status of a preferred creditor. Thereafter, a copy of the Hak Tanggungan book and copy of the APHT shall cause the issue of the certificate of Hak Tanggungan. At the same time, the Land Office shall record the Hak Tanggungan in the original land book at the Local Land Office and the original land certificate. Certificate of Hak Tanggungan consists of a copy of the HakTanggungan land book and a copy of the Hak Tanggungan Deed.3. The Right of Priority A holder of Hak Tanggungan has a priority right over othercreditors upon encumbered land and has a priority right to have anyoutstanding loan and debt payments settled from any fundsgenerated from the liquidation of the property subject to the HakTanggungan. Nonetheless, it is possible that there is multiple HakTanggungan against the one plot of land with each being held by adifferent creditor. Therefore, the priority right rank of the HakTanggungan is based on the date of registration of the HakTanggungan. Simply, the first registered Hak Tanggungan shall182 Indonesian Legal System
  49. 49. Business Lawhave first right of settlement and each following Hak Tangunganholder will receive payment so long as funds from the sale of thesubject of the fiduciary security remain.4. The Transfer of the Hak Tanggungan In the case that loans are transferred or assigned to otherparties, the Hak Tanggungan secured for the loans are transferredalso to the other parties and should be registered based on thetransfer or assignment agreement. However, a new APHT is notrequired for this process.5. The Cancellation of Hak Tanggungan The cancellation of the Hak Tanggungan occurs at the pointin time any of the following occur: (1) cancellation of the debtsecured by the Hak Tanggungan; (2) release of the Hak Tanggunganby the Hak Tanggungan Holder; (3) a clearing of the HakTanggungan based on a ranking stipulation by the Chief Justice ofthe District Court (“Roya”), and (4) a cancellation of the right to theland which is subject to the Hak Tanggungan.6. The Enforcement of Hak Tanggungan Under the Hak Tanggungan Law, creditors have the right toimmediate execution (parate executie) upon the debtor’s property.On the debtor’s default, the creditor may execute the securedproperty without having to comply with the civil procedural law andprocedures of seizure. Therefore, a Hak Tanggungan holder enjoysthe right of direct execution, which is a relatively simple and cost-efficient means of ensuring payment of outstanding debts.Nevertheless, unless the debtor agrees to the auction, the AuctionOffice, which conducts and supervises the public auction, requires aIndonesian Legal System 183
  50. 50. Business Lawcourt order for the auction, which in veritably is a costly andlengthy process.7. The Position of the Holder of the Hak Tanggungan (mortgage) incases of Bankruptcy The position of the Hak Tanggungan’s holder in the order ofdistribution of the debtor’s assets remains unchanged by adeclaration by the debtor of bankruptcy. However, to enforce theHak Tanggungan (for closure), the Hak Tanggungan holder has towait 90 (ninety) days as of the declaration of bankruptcy by thecourt. (Article 56A of the Bankruptcy Law) If the Hak Tanggungan holder does not enforce its rightwithin the specified time, the curator or receiver at any subsequentauction of bankruptcy assets will carry execute any collateralfacility comprising the Hak Tanggungan holder’s right to share inthe proceeds of any sale. If the proceeds are insufficient to satisfythe Hak Tanggungan holder’s claim, then the Hak Tanggunganholder becomes a general creditor with respect to the settlement ofany remaining and outstanding debts.Fiduciary Security1. Definition of Fiduciary, Fiduciary Security, Grantor, and Grantee of the Fiduciary Security Fiduciary security is a relatively new type of security inIndonesia. Law No. 42 of 1999 on Fiduciary Security was enactedon 30 September 1999. Fiduciary is a transfer of the right of ownership of a propertybased on trust with the provision that the property transferred in stillheld by the owner of the subject property. Fiduciary security is aform of security right over moveable property either tangible or184 Indonesian Legal System

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